Practical Examples

Jump to a topic

Finance Companies

Offshore finance companies are normally established for the purpose of inter-group treasury management. Interest payments from group companies may be subject to withholding tax, but these taxes differ from the standard corporation taxes. Many large companies establish their own offshore companies for the purpose of mixing dividends of subsidiaries and deriving maximum advantage from tax credits. The interest paid can be a deductible charge for taxation purposes, thus consolidating interest payments in an offshore finance company provides a tax saving.

In certain countries, foreign exchange losses are not deductible for tax purposes. For example, if an offshore finance subsidiary that has been set up suffers a foreign exchange loss and that subsidiary company is then liquidated, the investment should be a tax-deductible item for the parent company.
Offshore finance companies are also used for leasing, particularly where an offshore structure is rich in funds which, if they are not invested, may be repatriated or subject to high levels of corporate taxation.

Offshore finance companies are often utilized as part of structures for acquiring foreign entities, real estate and other investment related projects.
Other benefits of such a company to the multinational entrepreneur are:

Protection of capital funds introduced from abroad to foster a self-owned project.
Tax relief on the cost of borrowing the funds.
Freedom to return interest on funds lent to the tax haven, so they can be reinvested at the best tax-free advantage.

Venture Capital Corporation

Offshore companies are regularly employed to raise venture capital through equity or debt issues in capital markets. Many corporations have sough to mitigate risk by accessing markets through offshore companies while at the same time reducing certain taxes.
This technique is a refinement of the offshore investment holding company. With prudent management, it can prove very profitable by itself, apart from accumulating tax-free profits.

Plant Rental Corporation

If a company in a service industry operates affiliated companies in various countries, the formation and financing of an offshore company to acquire capital equipment used in its operations could prove beneficial. The equipment is rented to the affiliate at market rates, and net income is left to accumulate in the offshore company. Alternatively, it can be attractive for a company in a high tax area to purchase the capital equipment, claim the usual allowances, and lease the equipment to the offshore company at commercial rates. Hence, profits are generated, which are not liable to tax assessment, while rental payments in most cases are tax deducible in their countries of origin.

Family Protection

One of the major objectives of many tax mitigation clients is to ensure that wealth established during their lifetime is not fettered away by future generations/circumstances. To avoid this tax planning firms can often provide a whole range of 'tailor-made' companies, trusts, foundations and establishments which can be used together with many of the other tax mitigation mechanisms already outlined. In particular, they can often be formulated to allow, whilst the original "settlor" is alive, for initial investment flexibility followed by a "fixed" structure upon his or her demise. In addition, with the correct advice, "asset protection schemes" can also legally avoid the almost universal "forced heirship" provisions of civil law jurisdictions.

Inheritance Tax Protection

Where a person is domiciled outside a territory and owns assets located in that territory, for instance, property, then such assets may be protected against inheritance tax and higher rates of taxation by holding the assets through an offshore investment company.

Probate and Privacy, Wealth Protection

A high net worth individual with properties or other assets in a number of countries may wish to hold these through the medium of a personal holding company so that upon his demise probate would be applied for in the country in which his company was incorporated rather than in each of the countries in which he might hold assets. This saves legal fees and avoids publicity. Again, not everybody wishes to advertise wealth and an individual may wish to hold property through an offshore entity simply because of the privacy which the offshore arrangement gives.

Stock Market Listings and Capital Raising Exercises

Many large corporations in economically and politically uncertain countries often diminish the perception of risk by moving ownership of assets and the base of their operations offshore.

Banking Companies

Many offshore banking institutions have been established in tax havens in recent years. Many of these institutions are subsidiaries of major international banks. Such institutions pay interest free of withholding tax and engage in international financing from offshore bases which are free from exchange controls. Such banking institutions and their associated trust companies are able to provide a wide range of financial services to their international clientele. Offshore banking institutions are also used by the smaller business Organisation and indeed in some cases by individual owners to act as offshore cash management centres.

Insurance Companies

There are a number of offshore havens which are keen to encourage the establishment of insurance companies which like banking companies bring employment and investment to the country of incorporation and generally enhance its reputation and its range of financial services. In a number of offshore havens it is possible to incorporate insurance companies which pay no tax in respect of their premium or investment income.

Captive Insurance

Captive insurance companies have been created by many multinational companies to insure and re-insure the risks of subsidiaries and affiliated companies. Captive insurance companies are particularly suitable for the shipping and petroleum industries and for the insurance of risks which might be insurable only at prohibitive premiums.

Real Estate Planning

A very popular practice is that a real property item is purchased by an offshore company which is registered as the proprietor in the Land Registry, and if the proprietor of this company (i.e. The beneficiary owner of the real property in question) wants to sell the real property, it is sufficient to sell the shares of his or her offshore company and thus avoid the real property transfer tax. The above mentioned structure is only possible in those jurisdictions where it is possible that a foreign entity owns the real property in question. In the jurisdictions where this is not possible, the real property can be owned in such a way that it is purchased by a company there which is owned by a foreign offshore company.

This way it is possible to achieve:
- Asset protection (nowhere are you listed as proprietor)
- You can avoid tax inheritance (after the death of the proprietor the bearer of the shares becomes a new proprietor)
- real property transfer tax, etc. (the proprietor is the person who owns assets of the offshore company)
- protection from forced inheritance or from heirs at law.

Property Holding Company

Another form of offshore holding company that has gained a lot of interest and popularity in recent years is using a company to hold property and property rights in an offshore location. Advantages of offshore property ownership include avoidance of inheritance tax, avoidance of capital gains tax, ease of sale which is achieved by transferring the shares in the company (and thus avoiding stamp duty payable by the purchaser) rather than transferring the property owned by the company and reduction of property purchase costs to the onward purchasers.

In certain circumstances there are significant tax advantages in having properties held by appropriate domestic and/or offshore mechanisms. For example, for non-domiciled individuals in the UK, a local company owned in turn by a tax-free company can legally avoid all capital gains taxes. The reason for this is that "shares" are considered "moveable" property under British law and capital gains realised by a non-domiciled individual through his or her interest in the offshore 'tax free' company is not a British taxable event unless the gains are directly remitted.
Further, by using appropriate tax treaties it may also be possible to arrange "back-to-back" loans to virtually eliminate domestic tax liability on rental payments. In respect to Continental property acquisitions, even in jurisdictions such as France, Spain and Portugal is also possible - with correct planning - to avoid CGT or equivalent taxes and various property acquisition duties (which are extremely high in the case of France) by using double taxation treaties/companies.

It should be remembered, in particular, that when a non resident company disposes of a property investment, no capital gains tax is charged and holding through an offshore company removes the application of inheritance tax which would apply if a non-domiciled investor held a UK property in his personal name.

The main benefits of the property holding company are:

Avoidance in most cases of local inheritance taxes on the property in the event of death of the beneficial owner.
Avoidance in most cases of local succession laws which can, in certain countries, stipulate to whom the property must pass.
Elimination in most cases of local transfer and capital gains taxes upon resale of the property.
Simplification of procedure upon resale of the property through the sale of the real estate holding company to the buyer saving both time and costs.
Exclusion of foreign exchange controls restrictions, in certain countries, in the event of the beneficial owner taking up residence in the property.
Ease of transfer to heirs in the event of the beneficial owner’s death.
Confidentiality of ownership.

A high net worth individual with properties or other assets in a number of countries may wish to hold these using a personal holding company so that upon their demise the need to obtain probate in each country is avoided. This will save on legal fees and avoids publicity.

E-COMMERCE

Shifting business to an Offshore Haven removes restrictions, regulations and taxation. What can you do with 50% more time and money?

Holding Companies

Use may be made of an offshore holding company which would fund the operation of subsidiaries in various countries so that the subsidiaries obtain the benefit of tax deductions on interest paid. If the holding company is situated in an offshore area where there are no income or corporation taxes and no requirement that dividends must be paid, then the profits which are accumulated in the tax free climate can be used to fund the requirement of subsidiaries or reinvested as business convenience suggests.

Many clients use offshore Holding Companies to own and fund subsidiaries in various countries, implement joint venture projects, hold publicly quoted companies, and so on. It is possible, in certain circumstances, for capital gains arising from the disposal of investments, to be made free of tax. In the case of dividend payments, reduced levels of tax on income can be achieved by utilising a company incorporated in a zero or low tax jurisdiction that has double tax agreements with the contracting state. For example, the Madeira SGPS Company has been used for investments in the European Union, since corporate entities registered there can avail themselves of the EU Parent/Subsidiary Directive. Cyprus has an extensive double tax treaty network with many Eastern European countries and countries of the former Soviet Union, and the use of Cypriot companies for inward investment into these countries provides a tax efficient conduit.
Subsidiaries may also benefit from tax deductions and interest paid on the funding provided by the Holding Company.

Personal Service Companies

Many companies utilize offshore companies for the employment of staff working on overseas assignments. This helps to reduce the costs associated with payroll and travel expense administration, and may provide a tax and social security saving benefit for the employees.

While not providing any specific legal or tax counsel, nevertheless for some individuals or companies, offshore companies may offer specific tax advantages over other jurisdictions.

Many individuals engaged in the provision of professional services in the construction, engineering, aviation, finance, computer, film, and entertainment industries can achieve considerable tax saving benefits through the establishment of an offshore personal service company.

The offshore company can contract to supply the services of the individual outside the country in which he/she is normally resident and the fees earned can accumulate offshore, free from taxation in the offshore centre. Payments to the individual can then be structured in such a way to minimize income tax.

The offshore employment company may not have to pay tax on its profits which can be reinvested in a tax free climate to generate further income from the offshore company. Payments to the individuals concerned can be structured in such a way as to minimise their tax liabilities. One example in this regard in respect of an overseas employment is to increase subsistence expenses as against fees as such which would be paid to the individual.

It is possible to minimise income tax through proper planning and representation of your personal income.

Intellectual Property (patent, royalty and copyright holding)

Offshore companies are an ideal tool for administration and management of licenses and intellectual properties including computer software, technical know-how, patents, copyrights and trademarks.

Upon the acquisition of rights, the offshore company can then enter into license or franchise agreements with companies interested in the exploitation of such rights around the world who would be able to exploit the intellectual property right in various countries. The income arising from such arrangements can be accumulated offshore. It is thought preferable to acquire, for example, a patent at the patent pending stage before it becomes very valuable so that the capital payment for the acquisition of the patent can be set at a lower amount.

In some circumstances the royalties may be subject to withholding tax at source, however, the interposing of a second company in another jurisdiction may reduce the rate of tax withheld at source (a carefully selected jurisdiction can withhold taxes on royalty payments with the commercial application of double tax treaties).

It is very common, for a nominal consideration, to transfer patent, copyright or trademarks in favour of an appropriate offshore/tax exempt company before significant appreciation. Once acquired it then being possible to issue intellectual property (IP) sub-licenses or exploitation rights to appropriate third party structures.

For example, a majority of software companies license their users through companies which are established in an offshore jurisdiction, or through a firm, which is not established in a classical offshore jurisdiction, but is controlled by such a firm.
Typical examples of such users include without limitation:
- software companies
- companies doing business in information technologies
- license and copyrights to books, articles, music, films, etc.
- certification authority, publishers of professional certificates, etc.

International Trading Company

Offshore trading companies are a proven efficient vehicle to expatriate capital and eliminate exchange controls restrictions through over-invoicing or under invoicing export/import transactions.

If an offshore trading company were to procure products from one country, and then sell them to another country, the profits arising out of the transaction may be accumulated in the offshore company, free from taxation in the offshore centre.

Another common use of an offshore trading company is for bulk purchasing. Such a structure is typically established by a group of associated or unrelated companies to benefit from economics of scale and reduced administrative costs, plus significant tax savings. Significant benefits achieved by this arrangement, include receipt of bulk buying discounts and accumulation in a tax-free area of the net mark-up on resale to the manufacturing units. Additionally, factoring trading debts of a company in a high tax jurisdiction through an offshore company established in a low tax jurisdiction may assist in transferring funds to the low tax jurisdiction.

A business company basically acts in the role of business mediation company, in the most ideal case it is doing business by itself. By its being registered in a liberal tax jurisdiction it taxes its profits at an acceptable tax rate or it does not tax them at all if it is subject to such a fiscal system which enables it to do so.

An offshore company may act as a distributor or sales company accepting orders directly from the customer and arranging delivery of the goods direct to the customer from the manufacturer or place of purchase. The surplus arising on the difference between purchase and sales price may be accumulated free of tax. This can be of particular interest where goods are purchased in one country and sold in another, yet the businessman is located in a third country. Goods may be shipped directly from the supplier to the purchaser with the supplier invoicing the offshore company, which then invoices the purchaser at a higher price, retaining the profit offshore. With such trading companies, it is important to choose an offshore area which has good communications as shipping and other documentation may be critical to the scheme.

Investment Holding Company

Funds accumulated through investment companies set up in offshore areas can be invested or deposited throughout the world and whilst generally returns or interest payable in respect of these funds will be subject to local taxation. There are a number of offshore areas in which funds may be placed either in tax free bonds or as bank deposits where interest is paid gross. Similarly, in many offshore areas no capital gains taxes are applicable. Capital gains arising from the disposal of particular investments can be made without taxation. In the case of dividend payments, reduced levels of withholding taxes can be achieved through the use of a company incorporated in a zero or low tax jurisdiction that has double tax agreements with the contracting state.

Companies wishing to invest in countries where a double tax agreement does not exist between both countries can establish an intermediary company in a jurisdiction where there is a suitable treaty.

Depositing free financial means in various currencies in foreign banks on term deposit or current accounts can protect the depositors from envying neighbours, competitors, executions, but it also sharply reduces the risk of economic bankruptcy connected with the economy of one country through diversification of assets into foreign jurisdictions. Another advantage is represented by the fact that the yields of term deposit accounts are not subject to taxation in offshore banks.

If we take into consideration that the average annual yield on a dollar term deposit account at a serious foreign bank established in a tax heaven is from 4.5 per cent to 8.5 per cent p.a., then it surely pays to consider an investment in an offshore jurisdiction. It is good to remind you that at present more than 2/3 of the liquid capital is concentrated in offshore financial centres or comes from these centres. The requirements on the registered capital of the bank are in a majority of offshore jurisdictions lower than in the onshore countries. Why should one consider the administration of offshore funds through an offshore company? Mainly for the fact that the assets are not owned by you as a natural person, but as a legal entity. Thus you can separate the ownership relation which will help you protect your assets and bank accounts in the case of a stress situation (execution, divorce, asset forfeiture through a judicial decision, etc.).

Both individuals and large companies regularly use offshore companies as vehicles to hold investment portfolios, which may consist of cash, stocks, bonds and other investment products. Cash assets held by offshore companies can earn deposit interest gross (free of tax) or can be placed in collective cash funds.

Personal offshore holding companies are often used by high net worth individuals to hold investments made in different markets and countries. Personal holding companies also provide the confidentiality required by the sophisticated investors; while at the same time, saving in professional and other fees associated with other structures. In such a structure, tax is not payable on income generated from the investment holding company’s assets, thereby increasing the amount available for other purposes.

Offshore companies are also regularly used for inheritance purposes and to reduce probate expenses. Such companies can provide privacy and may save legal and other professional fees.

Ship Management and Yacht Ownership

Without doubt in recent years there has been a great transfer of merchant navy registration from traditional areas like Britain, Norway and Greece to offshore shipping jurisdictions such as Panama, Liberia, the Isle of Man, Cyprus and the British West Indies. The use of offshore shipping companies can eliminate direct or indirect taxation on shipping. Shipping companies may own or charter ships, the profits from which activities can be accumulated tax free. Tax and legal requirements generally dictate that the offshore company owning a shipping vessel should be incorporated in the jurisdiction whose flag the ship flies. A certain prestige attaches to the registration of a ship or indeed a yacht at a British port of registry and the vessel can be surveyed at most ports throughout the world by a surveyor recognised by the UK Department of Trade and Industry. The British flag has always been regarded as one of the world's most dependable.

Correctly advised, an individual can also benefit from such tax free/low tax environments. Apart from the lower registration fees it may also be possible to rent or charter a vessel without any significant, or even any tax repercussions. Such benefits together with the ability to maintain a respectable flag - if a vessel is registered in the Channel Islands or a British colony it is fully entitled to fly the "Red Ensign" as if it was a native British vessel - have meant that few private yachts of any size are today registered in their home territory.
In addition, in certain circumstances it may also be possible to purchase a yacht through the Isle of Man with a local tax exempt company and then reclaim back any VAT paid by registering for VAT on the Island.

Links